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Sustainability assurance as a driver of change for the auditing profession

BAA annual conference 2008

Anton Du Toit

Academic Director: AccountingMonash South Africa (wholly owned by Monash University)

E-mail: anton.dutoit@buseco.monash.edu

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1. Introduction

2. Literature survey

3. Brief survey of reports

4. Analysis of findings

5. Conclusion and closure

Sustainability assurance as a driver of change for the auditing profession

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1. Introduction

1.1 Background

1.2 Problem statement

1.3 Objectives and methodology

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1.1 Background

• Profession: client size, international competition, computers• Next: sustainability assurance (SA)?• Financial statements, IFRS and annual report traditionally• Corporate governance growth (e.g. Cadbury)• Steady increase in reporting on sustainability, covering

social, environmental and economic performance• Now in stand-alone sustainability report (or CSR or social

or environmental or corporate accountability reports)• GRI guidelines for reporting

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1.1 Background (continued)

• Verification and assurance needed• AA1000 AS of AccountAbility• ISAE 3000 of the IAASB• Bigger focus on non-financial information (BR in the

UK & SOX in USA)• Demise of SME statutory audit• Auditor competent to provide sustainability

assurance?

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Current trend: 2 glossies

Nedbank 2006 Sustainability Report(Economic, Social and Environmental

bottom line – 123 pages)

Nedbank 2006 Annual Report(Chairman, Operations, AFS)(Fin. Bottom line) – 298 pages

Independent Audit Report by KPMG & Deloitte:

Reasonable Assurance

Verification Statement by Ernst & Young:

Limited Assurance

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1.2 Problem statement

• Auditor’s education never included prospective data, non-financial information, language, semantics

• Furthermore, large variations in sustainability reporting and SA worldwide

• Profession is changing, but not enough research into the philosophy of auditing and practical implications for providing SA

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1.3 Objectives and methodology

• 1. Should auditor be involved from a philosophical perspective?

• 2. If so, which factors need to be addressed? Standards, education and training, disclosure

• Pre-study for PhD – this paper is on philosophical level, inter-disciplinary and reviewing trends for deductive arguments. Empirical research still to be performed.

• NOT: Reasons for SA, markets•

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2 Literature survey – brief history

• Bookkeeping audit• More expensive labour in 1950s, clients larger.

Statistical sampling, audit manuals, internal controls and systems approach

• Technological revolution • Commercial pressure in 1980s• Now: move towards non-financial and narrative

reporting, change in profession needed.

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2 Literature survey – postulates

• Verifiability• No conflict of interest• Fin info free from irregularities• Good internal controls• Consistent GAAP• What was true in the past will hold true for the future• Independence• Professional – due care, etc. (Mautz & Sharf 1961)Still no audit risk and materiality, no non-financial info

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2 Literature survey – sust reporting

• TBL coined by John Elkington in 1994• Many sources state increase in non-financial information

and its importance• Stakeholders becoming important with CG• GRI Guidelines voluntary• KPMG studies show increase in sustainability reporting and

also in making it mandatory• Assurance reports growing, mixed with “other”• List of services in this area identified by ICAEW (2004)

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2 Literature survey – SA

• GRI G3 includes + for having external assurance• ISAE 3000 and AA1000 AS• Also Germany’s DRAFT IDW AsS821 and NIVRA’s 3410N• All 4 are critically compared with the postulates of Mautz &

Sharaf (results in part 4)• The FEE believes that SA is complex and that ISAE 3000 is

not sufficient.

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2 Literature survey – Competencies

Auditor competent to do:• Non-financial, narrative info: language and semantics

skills?• Predictive focus on data? ISAE 3400 – the examination

of prospective financial info – 14 years later, no progress.

• The expert knowledge in technical areas of safety, health and environment – multidisciplinary teams?

ISAE 3000 requires competencies but does not describe.

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2 Literature survey – Competencies

IRCA does provide a list of competencies:• SA skills• Stakeholder engagement skills• Sustainability development expert knowledge• The ability to make professional judgements

No consideration of the need for logical skills yet

Research of this area is at its minimum

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2 Literature survey – Hurdles

• Complexity of data to be verified• Cost considerations• Resistance to change• Emphasis still on financial information• Profession able to change on philosophical sound basis?• Skills and expertise available in this field• Potential for liabilities• Verifiability of non-financial and non-numerical information

remains an issue

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3 Survey of reports

Extracts not on statistical basis, just highlighting issues (reasonable assurance provided):

• “… we will continue to promote renewable energies…” (Endesa Chile SA)

• “We expect further growth in 2007” (ABN Amro)• “This report contains forward-looking statements” (ABN Amro)• “Significant growth is expected in 2007.” (Rabobank)Auditors:• KPMG: “The report is reliable in all material respects…”• Excellent report by E&Y in BP 2007 – awarded

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4 Analysis of findings

Auditing profession is robust, is it dynamic?Standards (3 of them, not AA1000 AS) and postulates:• No postulates or principles or philosophy dealt with• Only ISAE 3000 mentions non-financial subject matter• Conflict of interest: all 3 silent• Audit risk and materiality sometimes mentioned, but descriptions

still very hesitant• Verifiability: called appropriateness, adequacy. Not yet solved• Assertions mentioned but not properly described• Audit evidence and tests seem to be properly discussed

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4 Analysis of findings (cont.)

• Irregularities, fraud and errors, deficiencies mentioned, not described

• All 3 discusses internal controls and reliance thereon, but no objectives are set

• ISAE 3000 only one that is silent about referring to GRI• Prospective nature of data almost totally ignored• Lack of skills and expertise in language, semantics, logical skills,

auditing prospective data, not sufficiently taken into account• Hurdles as described in 2.6Biggest challenge: language skills and the ability to express an

opinion on narrative reports

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5 Conclusion and closure

Profession: principles and not commercial interestsConclusion:1. The auditor could include SA, but the philosophical framework

or foundation has not yet been developed2. Practical implications are found in the recommendations below

3 areas of concern:1. Better standards, based on postulates2. Competencies, education and training3. Research areas

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5 Recommendations - standards

• Meetings and workshops: profession, bodies, “other”, academics – facilitate research; objectives and practical issues solved; codification of best practice on a global basis

• One set of standards then to be issued (auditors and “others”) (perhaps combining financial and non-financial as well)

• Auditors should demonstrate that they can do it – vast resources for research, road-shows and promotions

Auditor should do it – well-known for integrity, objectivity and ethical compliance

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5 Recommendations - Competencies

Short courses, graduate courses, post-graduate.• Audit firms ensure their competencies• Logic to be part of syllabi• Care in assurance on predictive non-financial information• Consider registration with IRCA while setting up own level of

registration (via IFAC and member bodies)• Reasonable assurance: include statement that expectations,

belief, opinions, future intentions, etc., are excluded from assurance (best practice of E&Y to be in standard!)

• Until one set of standards, refer to both ISAE 3000 & AA1000 AS

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5 Recommendations – Research opportunities

• Postulates and philosophy – a new Mautz and Sharaf?• Empirical surveys of firms, investors, educators• Competencies and a framework for them• Logic• Technical expertise needed• Learn from “other” assurance providers• Co-operation between professional bodies• Measurement of TBL data• Limits of types of data to be assured

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5 Closure

• Growing need for SA• “New” Worldcom or Enron in 10 years’ time?• Rather use sustainability assurance as a driver

of change in the auditing profession to become competitive with “others” and to widen its scope (beyond financial) to address the needs of the international business society

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The auditor’s problem is a definition:

sustainable economics [s] - (n) what economists think is possible, but environmentalists do not.

Let us all prevent the following of say nothing, hear nothing, see nothing:

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